GDP

Question 1

Name the four methods of calculating GDP

Answer 1

1. Measure all expenditure of final goods
2. The value-added method
3. The production method
4. The income method

Question 2

What is GDP?

Answer 2

The market value of all goods and services produced in a country during a period of time

Question 3

How is GDP calculated using the value-added method

Answer 3

By adding up the value added by every firm involved in the production process of goods and services

Question 4

How do you calculate GDP Using the production method

Answer 4

Add up all goods and services produced by economies in a year then subtract the cost of goods and services used in the production process

Question 5

Name the four components of GDP

Answer 5

1. Consumption
2. Investment
3. Government purchases
4. Net exports

Question 6

What does consumption mean with regards to GDP

Answer 6

Spending by households on goods and services, not including spending on new houses

Question 7

What does investment mean with regards to GDP

Answer 7

Spending by firms on new factories, office buildings, machinery and inventories, plus spending by households on new houses

Question 8

What does government purchases mean with regards to GDP

Answer 8

Spending by federal, state and local governments on goods and services

Question 9

What does net exports mean with regards to GDP

Answer 9

The expenditure on exports minus the expenditure on imports

Question 10

Define real GDP

Answer 10

The volume of final goods and services, holding prices constant, and showing changes in output only

Question 11

Define nominal GDP

Answer 11

The market value of final goods and services evaluated at current year prices, which means it can change over time due to changes in input and output

Question 12

So what is the difference between real and nominal GDP

Answer 12

Nominal GDP measures prices at current prices. Whereas, real GDP uses a deflator. Therefore, it measures a constant price without inflation

Question 13

List the weaknesses of GDP

Answer 13

• GDP is not an accurate measure of well-being
• GDP does not capture all production

Question 14

List the shortcomings of GDP as a measure of total production

Answer 14

• does not take into account the goods and services people produce for themselves
• does not take into account the buying and selling of services that are concealed from the government to avoid taxes or are illegal

Question 15

List the shortcomings of GDP as a measure of well-being

Answer 15

• it is measured as a total, therefore, it does not take into account the distribution amongst the population
• the value of leisure is not included
• the level, quality of and access to healthcare is not measured
• not adjusted for negative affects (I.e. pollution)
• not adjusted for changes in crime and other social problems
• money does not buy you happiness